PUGET SOUND ENERGY v. City of Bellingham

Citation: 259 P.3d 345Docket: 65928-6-I

Court: Court of Appeals of Washington; August 29, 2011; Washington; State Appellate Court

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The court case involves Puget Sound Energy, Inc. (PSE) appealing a decision from the City of Bellingham regarding a tax assessment. Following an audit from January 2004 to September 2008, the city assessed PSE a total of $919,662.11, which included $680,316.76 in city utility tax and $239,345.35 in penalties. This assessment was based on the determination that certain revenues, initially classified by PSE as subject to business and occupation (B.O.) tax, should instead be subject to city utility tax.

PSE contended that the city unlawfully imposed utility tax on revenues from retail sales of tangible personal property and other non-utility revenue. In response to a discovery request from the city, PSE defined its position, asserting that only its gross income from selling electricity was subject to the utility tax, while various other revenues, such as those from selling steam and related service fees, were classified as non-utility revenue.

Both parties filed cross motions for summary judgment, with the trial court ruling in favor of the city, dismissing PSE’s action, which led PSE to appeal. PSE's primary argument on appeal is that the city utility taxation ordinance's language supports its claim that the activities it classified as non-utility should not be taxed. The court, however, disagreed with PSE's interpretation.

The construction of a city taxation ordinance is a legal issue reviewed de novo on appeal, with the taxpayer responsible for demonstrating that the tax paid is incorrect. The interpretation of municipal ordinances follows the same principles as statutory interpretation. An unambiguous statute relies on its plain language, while ambiguity arises when multiple reasonable interpretations exist. The city's utility taxation ordinance imposes a six percent tax on all persons engaged in selling or furnishing electric light and power, assessed on total gross income from such business.

PSE argues for a narrow interpretation of this ordinance, suggesting that only specific revenue from energy charges and customer fees should be taxed. However, the ordinance's language indicates a broader scope, encompassing the entire commercial enterprise of selling electric light and power, not limited to the sale of electricity itself. Therefore, the ordinance clearly applies to more than just revenue from kilowatt hour and basic charges.

PSE bears the burden of proving the city’s tax assessment is improper but fails to argue effectively why its so-called 'non-utility' activities are not part of its overall business of selling electric light and power. PSE classifies certain activities as 'sales and leases of tangible personal property,' specifically related to hardware and software leasing to Quanta Services, Inc. However, it does not demonstrate that these activities are unrelated to its primary business, as the lease agreement restricts the use of the leased property to obligations connected to PSE's operations.

PSE has not sufficiently justified why certain charges it incurred, such as billing initiation, connection and reconnection, disconnection visit fees, and late payment fees, should be classified outside its electric utility business. The burden of proof lies with PSE to demonstrate that the city's tax assessment is incorrect; without such evidence, the assessment remains valid. The city's utility taxation ordinance clearly applies to anyone engaged in selling or furnishing electric light and power, encompassing more than just direct revenue from electricity sales. PSE's claims of 'non-utility' activities fail to exclude these charges from the scope of the ordinance, thus affirming the legitimacy of the tax assessment.

Additionally, PSE argues that the city's tax violates statutory rate limits and equal protection principles. However, RCW 35.21.710, which mandates a uniform tax rate for retail sales based on gross receipts, does not apply in this case. PSE has not proven that the revenue it classifies as 'non-utility' is derived from retail sales, as the city’s utility tax—not retail tax—accurately applies to these revenues. The city retains the authority to define its tax categories independently of state classifications, which reinforces that its utility tax on PSE's non-utility revenue is valid. Therefore, RCW 35.21.710's provisions regarding retail taxation do not govern this situation.

PSE's claim that the city’s tax assessment breaches federal and state constitutional provisions fails due to insufficient evidence that the city improperly assessed utility taxes on revenue PSE categorizes as 'non-utility revenue.' PSE cannot prove that its treatment differs from similarly situated entities, which is necessary to establish a violation of the equal protection clause of the U.S. Constitution or the privileges and immunities clause of the Washington Constitution. As an electric utility, PSE is not in the same class as retailers or service providers subject to city business and occupation tax, and the city’s taxation of PSE aligns with its treatment of other utilities.

The city is not required to classify PSE’s activities for tax purposes in the same manner as the state does. It correctly assessed city utility tax on revenue from activities PSE denotes as 'non-utility.' Furthermore, PSE argues that the city improperly included 'utility tax charges' collected from customers in its gross income calculation. However, under the city's utility tax definition, 'gross income' encompasses all earnings, including those tax charges. Previous rulings, such as in Sprint Spectrum, indicate that utility tax obligations remain with the utility itself, not the customers, and these charges are considered part of the overall revenue used to calculate utility tax liability. Thus, the city’s tax assessment aligns with legal definitions and precedents.

PSE's practice of passing the city-imposed utility tax to its customers does not transfer the tax obligation to them; customers receive only electric service in return. The utility tax is classified as one of PSE's operating expenses and the revenue collected from customers for this tax constitutes "value proceeding or accruing" to PSE, making it subject to city utility tax. Therefore, the city's tax assessment correctly included this revenue in calculating PSE's utility tax liability. The court affirmed this position, stating that PSE has not provided evidence to counter the assertion that its lease agreements and operations contribute to its electric utility business. Additionally, previous issues regarding the taxation of steam sales have been settled, and the discussion includes references to the Fourteenth Amendment and Washington State Constitution regarding equal protection and privileges. PSE's claims that its situation differs from Sprint Spectrum due to its status as a regulated utility were rejected, affirming that the revenue from utility tax charges remains taxable regardless of the circumstances under which it is collected. The earlier ruling in Puget Sound Energy, Inc. v. City of Redmond does not apply, as it was specific to that city's tax ordinance and does not limit Bellingham's taxation authority over PSE.